It Begins: Cash Strapped Cities Begin To Crumble

Our nascent economic recovery may
come too late to save many American cities from bankruptcy, which
in turn will deal heavy losses to municipal bond investors and
the companies that insure munis.

The latest fright comes from Harrisburg, the capital of
Pennsylvania. The city is considering seeking bankruptcy
protection—as well as tax hikes and asset sales—to address $68
million in debt service payments due this year.

Harrisburg does not stand a chance at making its payments. The
$68 million in debt service payments is four times what the city
expects to raise through property taxes and $4 million more than
the city’s entire operating budget.

Ironically, the debt burden that is trashing Harrisburg was
incurred to build a waste incinerator.

Carol Cocheres, bond counsel for the incinerator’s operator, the
Harrisburg Authority, told the city council at a Dec. 14 hearing
that the city is already in danger of legal action for payments
that were missed last year on $288 million in debt it has
guaranteed with its full faith and credit.

“There’s never been a default like this in Pennsylvania municipal
history,” she said. “This is all new territory.”

Cocheres told council members that by skipping payments that are
made on behalf of the authority, the city risks being sued and
ordered to raise taxes or fees by Assured
Guaranty Municipal Corp., formerly FSA Insurance, which has
insured the bonds, or by the deal’s trustee, TD Bank.

Not that long ago, journalists and some regulators were arguing
that municipal bond insurance was something of a scam because
munis had such a low historical default rate. That now looks like
the same kind of turning a blind eye to risk that led to the
housing-led financial crisis.